Certain taxpayers affected by Hurricane Florence have until Jan. 31, 2019, to meet all of their tax filing and payment obligations that had original deadlines of Sept. 7, 2018, or later.
This postponed deadline applies automatically to taxpayers located in the designated disaster areas:
- North Carolina counties: Allegany, Anson, Ashe, Beaufort, Bladen, Brunswick, Cabarrus, Carteret, Chatham, Columbus, Craven, Cumberland, Dare, Duplin, Granville, Greene, Harnett, Hoke, Hyde, Johnston, Jones, Lee, Lenoir, Montgomery, Moore, New Hanover, Onslow, Orange, Pamlico, Pender, Person, Pitt, Randolph, Richmond, Robeson, Sampson, Scotland, Stanly, Union, Wayne, Wilson, and Yancey.
- South Carolina counties: Berkeley, Charleston, Chesterfield, Darlington, Dillon, Dorchester, Florence, Georgetown, Horry, Marion, Marlboro, Orangeburg, Sumter, and Williamsburg.
- Virginia counties: Henry, King and Queen, Lancaster, Nelson, Patrick, Pittsylvania, and Russell counties and the independent cities of Newport News, Richmond, and Williamsburg.
Tax obligations that qualify for this relief include payments of 2018 third-quarter estimated income taxes (traditionally due on Sept. 17) and filings of quarterly payroll and excise tax returns (traditionally due on Oct. 31). In addition, business and individual taxpayers who have valid extensions to file their 2017 federal tax returns by the respective September 17 and October 15 deadlines now have until the end of January to meet those filing responsibilities without incurring a penalty.
It is important for businesses to recognize that penalties on payroll and excise tax deposits due on Sept. 7, 2018, and before Sept. 24, 2018, will be abated as long as they make the deposits by Sept. 24, 2018.
Taxpayers who live outside the designated disaster areas and are unable to meet their upcoming filing obligations may request a deadline extension when their records are located in the disaster areas or when they are working with a recognized government agency or philanthropic organization that is assisting with relief efforts. In addition, taxpayers should note that as storm recovery continues, other counties may be further designated as disaster areas eligible for the deadline extension.
Not only does this deadline extension alleviate the pressure for storm victims to timely complete and file their returns, it also provides taxpayers located in President-declared disaster areas to claim a casualty loss on their 2017 tax returns (rather than 2018), if they desire to do so.
About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director of Taxation and Financial Services with Berkowitz Pollack Brant Advisors and Accountants, where he provides tax- and estate-planning counsel to high-net-worth families, closely held businesses and professional services firms. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.
The IRS recently issued its first round of proposed guidance concerning the pass-through deduction that tax reform introduced to qualifying business owners and to beneficiaries of trusts and estates beginning in the 2018 tax year. Taxpayers who own interests in pass-through businesses structured as LLCs, partnerships, S Corporations, or sole proprietorships now have guidance from the IRS on how they may qualify for and calculate a tax deduction of up to 20 percent of their U.S.-source qualified business income (QBI) that passes from each of their qualifying businesses through to their personal income tax returns. Taxpayers can use the proposed guidance for tax planning in 2018 and future years until the IRS issues final regulations, which are not expected until October 2018 at the earliest.
What is QBI?
The Tax Cuts and Jobs Act (TCJA) introduced the concept of QBI and defined it as the net amount of income, gains, deductions, and losses effectively connected with a taxpayer’s qualified U.S.-source trade or business, including LLCs, partnerships, S Corporations, sole proprietorships, and trusts and estates. QBI also includes qualified dividends taxpayers receive from real estate investment trusts (REITs), qualified cooperative dividends, qualified income from publicly traded partnerships (PTPs), and income generated from rental property or from trusts and estates with interests in qualifying entities. Under this definition, the QBI deduction may apply to U.S. citizens, resident aliens, and nonresident aliens (or foreign taxpayers) who receive qualified U.S.-source income from a trade or business, business trust, or estates of decedents.
QBI excludes income not effectively connected with a U.S.-source trade or business, investment income, interest income, and capital gains and losses.
How is the QBI Deduction Calculated?
For tax years 2018 through 2025, the maximum amount that a qualifying business owner, trust or estate may deduct from its QBI is the lesser of:
- 20 percent of QBI from each of the taxpayer’s trades or businesses plus 20 percent of the taxpayer’s qualified REIT dividends and PTP income; or
- 20 percent of the portion of the taxpayer’s taxable income that exceeds the taxpayer’s net capital gain.
Taxpayers must calculate the QBI deduction separately for each of their trades or businesses. Qualified taxpayers will then report their QBI, net of the QBI deduction, on their individual income tax returns. Taxpayers eligible for the full 20 percent QBI deduction are subject to a top effective tax rate of 29.6 percent on their QBI.
Are there QBI Deduction Limitations?
Yes. Once annual taxable income (before the QBI deduction) exceeds $157,500 for individuals, or $315,000 for married couples filing jointly, the QBI deduction is subject to restrictions based upon the amount of wages paid to W-2 employees and the unadjusted tax basis of qualified property immediately after acquisition (UBIA). Note that the QBI deduction calculated from qualified REIT dividends and PTP income is not subject to these limitations.
When taxable income exceeds the annual threshold of $157,500 for individuals or $315,000 for married couples filing jointly, the QBI deduction is limited to the lesser of (1) or (2):
- 20 percent of QBI, or
- the greater of:
-
- 50 percent of the entity’s W-2 wages; or
- 25 percent of W-2 wages plus 2.5 percent of the UBIA (or the original purchase price) of depreciable tangible property, including real estate, furniture, fixtures, and equipment, that the business owns and uses to generate qualifying business or trade income.
W-2 wages are limited to the compensation amount the trade or business pays and reports to its common law employees on Form W-2. For this purpose, the proposed regulations clarify that payments made by Professional Employer Organizations (PEOs) and similar entities on behalf of trades or businesses can qualify as W-2 wages, provided that the PEOs issue the W-2’s to persons considered common law employees by the trades or businesses.
Under these limitations, pass-through businesses that pay large sums of W-2 wages may be able to take a larger QBI deduction than businesses that pay less W-2 wages or have fewer W‑2 employees. Similarly, capital-intensive businesses may be in a better position to maximize their QBI deductions than entities without a significant amount of tangible assets.
Are there Additional Limitations?
Yes. The TCJA introduced a new concept of specified service trades or businesses (SSTBs), which are subject to additional QBI deduction limitations. SSTBs are entities that involve the delivery of services in any of the following fields:
- accounting;
- actuarial science;
- athletics;
- brokerage services;
- consulting;
- financial services;
- health;
- investing and investment management, trading, or dealing in securities, partnership interests or commodities;
- law;
- performing arts; or
- any trade or business that generates income based on the taxpayer’s fame or celebrity.
Once a taxpayer has taxable income (before the QBI deduction) in excess of $207,500 ($415,000 for jointly filing taxpayers), the QBI deduction attributable to an SSTB is completely phased out. However, the new law does provide an exception for a trade or business with SSTB receipts to qualify for the QBI deduction when it meets either of the following tests:
- Annual gross receipts from all operations are less than $25 million, and less than 10 percent of that amount comes from SSTB services; or
- Annual gross receipts from all operations are more than $25 million, and less than 5 percent of that amount is derived from SSTB services.
How Can I Maximize Tax Savings from the QBI Deduction?
The rules for qualifying and calculating the new QBI deduction are complex and should not be addressed without guidance from experienced tax professionals. This is especially true when considering that the law and proposed guidance provide taxpayers with opportunities to improve their tax savings while maintaining compliance with the regulations.
For example, taxpayers may reduce their exposure to QBI deduction limitations when they increase the number of their W-2 employees or purchase equipment they currently lease. In addition, high-income taxpayers may be able to receive a larger QBI deduction when they aggregate their ownership interests in multiple qualifying businesses and treat them as a single business for calculating QBI, W-2 wages, and UBIA of property. Outside of QBI, some taxpayers may benefit by changing their entity to a C Corporation, which is subject to a flat 21 percent tax rate beginning in 2018. These decisions are neither easy, nor should they be made without weighing other key factors beyond the tax implications.
Taxpayers should meet with experienced tax advisors who not only understand the nuances of the law but who also can apply and substantiate claims of tax benefits based on the language of the guidance while adhering to the law’s anti-abuse provisions.
About the Author: Thomas L. Smitha, JD, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where he provides accounting and consulting services, as well as tax planning and tax structuring counsel to private and publicly held companies. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.
Thanks to the equity market’s wild bull market run since bottoming out in 2009, many investors’ portfolios look rather rosy. However, with these impressive returns come taxes on capital gains. While the Tax Cuts and Jobs Act retains the 0%, 15%, and 20% tax rates on qualified dividends and long-term capital gains resulting from the sale of assets held for more than one year, the new law changes the income brackets that apply to these rates. For 2018 through 2025, the following rates will apply based on an individual’s taxable income and filing status:
| Tax Rate |
Single Filers |
Married Filing Jointly |
| 0% |
$0 to $38,600 |
$0 to $77,200 |
| 15% |
$38,601 to $425,800 |
$77,200 to $479,000 |
| 20% |
$425,801 and above |
$479,001 and above |
Taxpayers should note that these brackets apply only to long-term capital gains and dividends, which may also be subject to the 3.8 percent Net Investment Income Tax (NIIT) for high-income earners. Conversely, the tax rates for short-term capital gains resulting from the sale of assets held for one year or less will continue to be tied to the seven ordinary income tax brackets, which beginning in 2018 are reduced to 10%, 12%, 22%, 24%, 32%, 35% or 37%.
Although these changes under the new law will result in many taxpayers owing less to the federal government, it is important for high-income taxpayers, in particular, to meet with their advisors and accountants and implement strategies that could reduce their long-term capital gain tax liabilities even further.
For example, taxpayers may take advantage of the TCJA’s higher standard deduction, which nearly doubles in 2018 to $12,000 for single filers and $24,000 for married filing jointly, in order to reduce their taxable income (including long-term gains and dividends) to a lower threshold and qualify for a lower tax rate.
Another strategy available to taxpayers is to remove appreciated assets and any related capital gains from their investment portfolios. One option is to donate appreciate assets held for more than one year to a charity or a donor-advised fund. The assets can continue to grow tax-free to the charity and provide the taxpayers with an immediate charitable deduction, subject to limitations. Alternatively, taxpayers may remove appreciated assets from their taxable income by gifting them to family members. In fact, in 2018, individuals may gift up to $15,000 in cash or assets to as many people as they choose without incurring gift taxes. When the taxpayer is married, he or she can annually gift as much as $30,000 per recipient tax-free. The amount of this gift tax exclusion is adjusted annually for inflation.
Finally, the tried and true method of harvesting capital losses to offset capital gains may be difficult to employ since many investors will be hard-pressed to find losses after the recent market run-ups. Yet it is critical for investors to pay attention to their capital gains and be prepared to take action if, and when, the amount of their resulting tax liability is beyond their budget.
About the Author: Adam Slavin, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practices, where he provides tax planning and consulting services to high-net-worth individuals and closely held business. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at info@bpbcpa.com.
The IRS recently issued its first round of proposed guidance concerning the pass-through deduction that tax reform introduced to qualifying business owners and to beneficiaries of trusts and estates beginning in the 2018 tax year. Taxpayers who own interests in pass-through businesses structured as LLCs, partnerships, S Corporations, or sole proprietorships now have guidance from the IRS on how they may qualify for and calculate a tax deduction of up to 20 percent of their U.S.-source qualified business income (QBI) that passes from each of their qualifying businesses through to their personal income tax returns. Taxpayers can use the proposed guidance for tax planning in 2018 and future years until the IRS issues final regulations, which are not expected until October 2018 at the earliest.
What is QBI?
The Tax Cuts and Jobs Act (TCJA) introduced the concept of QBI and defined it as the net amount of income, gains, deductions, and losses effectively connected with a taxpayer’s qualified U.S.-source trade or business, including LLCs, partnerships, S Corporations, sole proprietorships, and trusts and estates. QBI also includes qualified dividends taxpayers receive from real estate investment trusts (REITs), qualified cooperative dividends, qualified income from publicly traded partnerships (PTPs), and income generated from rental property or from trusts and estates with interests in qualifying entities. Under this definition, the QBI deduction may apply to U.S. citizens, resident aliens, and nonresident aliens (or foreign taxpayers) who receive qualified U.S.-source income from a trade or business, business trust, or estates of decedents.
QBI excludes income not effectively connected with a U.S.-source trade or business, investment income, interest income, and capital gains and losses.
How is the QBI Deduction Calculated?
For tax years 2018 through 2025, the maximum amount that a qualifying business owner, trust or estate may deduct from its QBI is the lesser of:
- 20 percent of QBI from each of the taxpayer’s trades or businesses plus 20 percent of the taxpayer’s qualified REIT dividends and PTP income; or
- 20 percent of the portion of the taxpayer’s taxable income that exceeds the taxpayer’s net capital gain.
Taxpayers must calculate the QBI deduction separately for each of their trades or businesses. Qualified taxpayers will then report their QBI, net of the QBI deduction, on their individual income tax returns. Taxpayers eligible for the full 20 percent QBI deduction are subject to a top effective tax rate of 29.6 percent on their QBI.
Are there QBI Deduction Limitations?
Yes. Once annual taxable income (before the QBI deduction) exceeds $157,500 for individuals, or $315,000 for married couples filing jointly, the QBI deduction is subject to restrictions based upon the amount of wages paid to W-2 employees and the unadjusted tax basis of qualified property immediately after acquisition (UBIA). Note that the QBI deduction calculated from qualified REIT dividends and PTP income is not subject to these limitations.
When taxable income exceeds the annual threshold of $157,500 for individuals or $315,000 for married couples filing jointly, the QBI deduction is limited to the lesser of (1) or (2):
- 20 percent of QBI, or
- the greater of:
-
- 50 percent of the entity’s W-2 wages; or
- 25 percent of W-2 wages plus 2.5 percent of the UBIA (or the original purchase price) of depreciable tangible property, including real estate, furniture, fixtures, and equipment, that the business owns and uses to generate qualifying business or trade income.
W-2 wages are limited to the compensation amount the trade or business pays and reports to its common law employees on Form W-2. For this purpose, the proposed regulations clarify that payments made by Professional Employer Organizations (PEOs) and similar entities on behalf of trades or businesses can qualify as W-2 wages, provided that the PEOs issue the W-2’s to persons considered common law employees by the trades or businesses.
Under these limitations, pass-through businesses that pay large sums of W-2 wages may be able to take a larger QBI deduction than businesses that pay less W-2 wages or have fewer W‑2 employees. Similarly, capital-intensive businesses may be in a better position to maximize their QBI deductions than entities without a significant amount of tangible assets.
Are there Additional Limitations?
Yes. The TCJA introduced a new concept of specified service trades or businesses (SSTBs), which are subject to additional QBI deduction limitations. SSTBs are entities that involve the delivery of services in any of the following fields:
- accounting;
- actuarial science;
- athletics;
- brokerage services;
- consulting;
- financial services;
- health;
- investing and investment management, trading, or dealing in securities, partnership interests or commodities;
- law;
- performing arts; or
- any trade or business that generates income based on the taxpayer’s fame or celebrity.
Once a taxpayer has taxable income (before the QBI deduction) in excess of $207,500 ($415,000 for jointly filing taxpayers), the QBI deduction attributable to an SSTB is completely phased out. However, the new law does provide an exception for a trade or business with SSTB receipts to qualify for the QBI deduction when it meets either of the following tests:
- Annual gross receipts from all operations are less than $25 million, and less than 10 percent of that amount comes from SSTB services; or
- Annual gross receipts from all operations are more than $25 million, and less than 5 percent of that amount is derived from SSTB services.
How Can I Maximize Tax Savings from the QBI Deduction?
The rules for qualifying and calculating the new QBI deduction are complex and should not be addressed without guidance from experienced tax professionals. This is especially true when considering that the law and proposed guidance provide taxpayers with opportunities to improve their tax savings while maintaining compliance with the regulations.
For example, taxpayers may reduce their exposure to QBI deduction limitations when they increase the number of their W-2 employees or purchase equipment they currently lease. In addition, high-income taxpayers may be able to receive a larger QBI deduction when they aggregate their ownership interests in multiple qualifying businesses and treat them as a single business for calculating QBI, W-2 wages, and UBIA of property. Outside of QBI, some taxpayers may benefit by changing their entity to a C Corporation, which is subject to a flat 21 percent tax rate beginning in 2018. These decisions are neither easy, nor should they be made without weighing other key factors beyond the tax implications.
Taxpayers should meet with experienced tax advisors who not only understand the nuances of the law but who also can apply and substantiate claims of tax benefits based on the language of the guidance while adhering to the law’s anti-abuse provisions.
About the Author: Thomas L. Smitha, JD, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where he provides accounting and consulting services, as well as tax planning and tax structuring counsel to private and publicly held companies. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.
The Tax Cuts and Jobs Act (TCJA) that went into effect on Jan. 1, 2018, provides an opportunity for taxpayers to accelerate generous depreciation deductions for “qualified property” acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2027. However, because lawmakers drafted and passed the Act in haste, many taxpayers are left confused by certain provisions of the new law, including the type of assets that qualify for first-year bonus depreciation. Following is the IRS’s recently issued guidance intended to answer taxpayers’ questions and help them to obtain the full benefit of immediately writing off the costs of certain business assets.
Confusion Created By Tax Reform
In general, the TCJA increases first-year bonus depreciation deductions from 50 percent to 100 percent for an expanded universe of qualified property, new and used, with a recovery period of 20 years or less, as long as the taxpayer acquired the property from an unrelated party after Sept. 27, 2017, and before Jan. 1, 2023. In 2023, these depreciation deductions phase down to 80 percent, followed by 60 percent in 2024, 40 percent in 2025, and 20 percent in 2026. Taxpayers that build or acquire improvements can realize enhanced benefits from this provision of the new law when they conduct cost segregation studies that identify qualified property they can fully expense.
The language of the TCJA eliminates the availability of bonus depreciation to qualified leasehold improvement property, qualified restaurant improvement property, and qualified retail improvement property placed in service on or after Jan. 1, 2018. Instead, it consolidates these types of property into a new category of Qualified Improvement Property (QIP), defined as improvements to interior portions of non-residential buildings placed in service before the placed-in-service date of the improvements with a few exceptions.
IRS Clarification
While, the IRS does not specifically address QIP as qualified property for bonus depreciation for tax years 2018 and beyond, it does provide confirmation that taxpayers can fully expense QIP on their 2017 tax returns when they acquire and begin construction on QIP after Sept. 27, 2017, and before Jan. 1, 2018.
The IRS’s recently issued guidance also provides taxpayers with some clarity on what constitutes used property for purposes of qualifying for bonus depreciation. For example, used property will qualify for bonus depreciation as long as taxpayers meet the following criteria:
- They had no depreciable interest in the property prior to or at the time of acquisition;
- They acquired the property from an unrelated third party in an arm’s length transaction; and
- They entered into a legally binding contract to acquire the property after Sept. 27, 2017.
With this in mind, it is important for taxpayers to understand that property they previously leased could qualify for bonus depreciation when acquired after Sept. 27, 2017. In addition, they may apply bonus depreciation to basis step-ups that result from a sale or exchange or a partnership interest. This preferential treatment of certain basis step-ups should be considered when planning a full or a partial buy-out of a partner and, in many situations, could make sales of partnership interests more attractive than partnership redemptions. Furthermore, the proposed guidance clarifies that when a taxpayer acquires used property in a like-kind exchange, only the “new funds” basis (and not the carryover basis) may qualify for bonus depreciation.
To help taxpayers maximize tax savings opportunities under tax reform, they should meet with qualified accountants and advisors who understand all of the nuances of the law and how to apply subsequent guidance to taxpayers’ specific and unique circumstances.
About the Author: Angie Adames, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where she provides tax and consulting services to real estate companies, manufacturers and closely held business. She can be reached at the firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.
Posted on September 02, 2018